The Latest Real Estate Guide to Investing in the U.S. Housing Market
(Disclaimer: The content of this article is not intended as financial or investment advice but rather information for educational purposes only.)
This article is based on the episode of the Building Equity podcast “What’s ACTUALLY Happening in the US Housing Market | A New Real Estate Investors Guide in 2023” with guest Jason Hartman, CEO of Empowered Investor and Real Estate Tools, available on YouTube right now. Click here to watch the episode. Check out Jason Hartman’s work here.
Investing in real estate may be tough for some to consider with asset prices being so high. It can be extremely discouraging when potential investors see the costs associated with completing a real estate transaction, so much so that it may deter people and they miss out on an incredible opportunity to generate long-term profits.
It’s crucial to understand the metrics behind real estate investing when looking at both cash flow and asset prices versus other hard assets, like investing in gold and silver as well as notes and mortgages that are secured by real property investments in private businesses. It’s tough to grasp the worth of an asset without getting perspective on how valuable it actually is when compared to others.
Understanding the Current Economic Climate as it Relates to Real Estate Investing
Recent data suggests that we are on the cusp of a recession. While the Federal Reserve is trying the best they can to stop inflation for our centrally planned economy, had they raised interest rates sooner and at a more gradual pace, the idea of a soft landing might have been more plausible.
While inventory in the housing market is higher than it was before, it is still historically low. As of February 2023, there’s about 625,875 homes for sale in the United States. Experts suggest that a normal market would contain anywhere from 2 to 2.5 times that amount, leaving the current market with approximately 6 months left of inventory at current absorption rates. This isn’t the only deviation; we’re also seeing current property owners with incredibly cheap mortgage rates.
Many homeowners with mortgages have rates far below today’s level, and recent data reveals that 37% of all homes in the United States are paid off, meaning overall, people are not under financial duress with mortgage obligations. To technically have a “crash”, there should be both distressed owners and distressed sellers.
Note: At the time of this writing, we are seeing consumer credit card debt and subprime auto loan delinquencies surge. How this affects the 37% of homes that are free and clear we don’t know, but figured it worthwhile to include as it seems likely we are transitioning.
Based on current data and trends, it’s safe to assume that the rest of the country also has relatively low existing mortgage rates, so there is no evidence or indicators of an imminent crash as of right now.
The Biggest Mistake Investors Make
The first mistake that most investors make is that they don’t invest. People find all types of justifications and reasons to avoid investing in real estate, whether it’s overall hesitancy or attempting to time the market. However, as with any asset class, market timing has historically been proven to be an ineffective strategy. The most successful investors are those that make smart, value-oriented decisions, buying and holding their assets.
A perfect example of this is the great recession of 2008: this was an anomalous instance, an occurrence that happened once in seven decades, and as the economy rebounded, prices began to rise and people began to worry, thinking the metaphorical “bubble” was on the verge of bursting any minute. As many people anticipated this being the peak of the market, they waited for a cool off period, preserving their cash for a “right time” to invest, creating even more doubt and missed opportunities. Had people remembered that we are in a centrally planned economy, they would have had more confidence to capitalize.
As the central planners react to the market, it’s not just a matter of supply and demand or basic economic fundamentals. When things get bad, the Fed makes changes and specific adjustments while the government does the same. During the COVID-19 pandemic, when many chose not to invest or change their current investment strategy, some lost out on appreciation. And that’s the thing about investing, you actually need to invest if you want to reap the benefits.
Furthermore, research has shown if people hold onto their money without investing, it is guaranteed they will lose 9% a year just to inflation.
Using the Right Measuring Stick to Understanding Intrinsic Value
Many people may have trouble assessing value because they’re using the wrong measuring gauge; they compare the price and the value of real estate to one thing: the U.S. dollar. The U.S. dollar is a moving target, meaning it’s constantly being debased by inflation, which makes this metric a huge mistake in terms of determining value. It’s smarter to compare with other commodities and asset prices to understand the concept of intrinsic value.
In November 2022, the National Association of Realtors is claimed valuations could rise, year over year by 1%. Yet larger institutions like Morgan Stanley and Goldman Sachs are predicting 5-10%, claiming over 2023, we’ll be seeing a 5-10% drop in valuations.
Looking at a country as large and diverse as the United States is, there are almost 400 MSAs (Metropolitan Statistical Areas). There are 50 states with over 3,100 counties and 9,000 cities, meaning lumping these all together is not the correct metric for an accurate assessment.
To get a more precise estimate, the Hartman Comparison Index (HCI) was created by Jason Hartman. This tool compares the price of real estate over the last 52 years to other commodities with intrinsic value that people need to live that are not attached to any one currency.
Commodities such as lumber, concrete, copper, and petroleum products all have intrinsic value, meaning it doesn’t matter what currency they’re being traded in because they’re traded worldwide. They’re needed by everybody.
Hartman Comparison Index (priced in gold)
This HCI example compares the prices of homes to gold. Billions of people consider gold to be money, and up until 1971, the United States operated on a gold standard. But let’s look back to 1970 for some insight when the median price house was $23,000 and gold was $35 an ounce. If you wanted to buy the median price house, you would need 654 ounces of gold. Just 10 years later, as we experienced inflation from the 80s, the median price house tripled to almost $63,000. The gold price went way up to $653, and it would only take 97 ounces of gold to buy the median price house.
Fast forward to 2010 as the country is coming out of the Great Recession; the median house price for a home is $171,000, and gold is almost at $1,100 an ounce. It would take 158 ounces of gold to buy the median price house. Today, the median price of a house is $390,000, and gold is about $1700 an ounce. It would take 227 ounces of gold to buy the median price house.
Priced in gold, housing is certainly not the cheapest it’s ever been, but it’s also not the most expensive it’s ever been either.
Hartman Comparison Index (priced in oil)
Looking at oil, arguably one of the world’s most important commodities, back in 1970, the $23,000 median price house priced in oil was at $4 a barrel, so it would’ve cost 6,400 barrels of oil to buy the median price house. Ten years later in 1980, the house prices almost tripled, and oil was up to $37 a barrel, meaning it would’ve taken 1700 barrels of oil to buy a house.
Looking at today, the median price of a house is $390,000, and oil is at approximately $94 a barrel, meaning it would require 4,100 barrels of oil to buy the median price house.
When assessing whether housing in oil is cheaper or more expensive, it’s clear that it’s not the cheapest it’s ever been but certainly not the most expensive either.
Hartman Comparison Index (priced in rice)
We can look at other popular commodities like rice, which is the food stock of more than half the world, and priced in rice, housing is rather cheap today. And we can keep going.
Hartman Comparison Index (priced in shares of S&P)
We can price it in shares of the S&P 500 index. Priced in the S&P, housing is relatively cheap; it’s only 98 shares of the S&P to buy the median price house. According to the chart, back in 1970, it cost 249 shares of the S&P to buy the median price house, and in 2010, it was 136 shares, meaning price in shares of the S&P for housing is rather cheap, not the cheapest it’s ever been but still affordable.
The best way to comprehend the measurement of what an asset is worth is by comparison/relation to other hard assets. Understandably, most people don’t denominate their lives in gold or oil or any other commodities in the Hartman Comparison Index, but they have a choice, a major one that involves their money and, essentially, their future wealth. When people get paid every two weeks or every month, they do something with their extra money; they either put it in the bank or in a savings account, or they buy stocks or commodities, and they decide on a way to store their wealth until they save enough for a down payment on a house. If people save it in dollars, they can expect that over time because of inflation, they will lose money. Based on these revelations and empirical data, it’s clearly smarter to have money invested in things rather than currency units to maximize their IRA potential.
For more information on the Hartman Comparison Index or any of Jason Hartman’s teachings/strategies, visit his YouTube channel(https://www.youtube.com/@JasonHartmanRealEstate), JasonHartman.com, or listen to his podcast Creating Wealth(https://www.jasonhartman.com/tag/creating-wealth-show/). Investors are also encouraged to check out his Empowered Investor Pro membership(link) and his formal coaching program(link) for further guidance.
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